Iron Ore Seen Slumping to $75 by CLSA as Global Glut Widens

Iron ore cranes line a terminal of the Qingdao Port in Qingdao, China. Ore with 62 percent content at the Chinese port of Qingdao dropped to $87.62 a dry ton on Aug. 29, the lowest level since October 2009, according to Metal Bulletin Ltd. Photographer: Qilai Shen/Bloomberg News

Sept. 2 (Bloomberg) -- Iron ore will drop to $75 a metric
ton in the second half of next year as rising low-cost supplies
from Australia and Brazil worsen a global glut and the slowdown
in China’s property market curbs demand growth, said CLSA Ltd.

The commodity used to make steel will average $80 a ton in
2015, down from an earlier full-year estimate of $85, and $75 a
ton in 2016 and 2017, down from estimates of $80 for both years,
according to a report from analyst Ian Roper dated yesterday. By
quarter, prices were seen at $90 in January-to-March next year,
$80 in the second quarter and $75 for the final two three-month
periods, according to the report.

Iron ore lost 35 percent this year as producers including
Rio Tinto Group expanded low-cost supplies, pushing the market
into a glut. New-home prices in China, which buys about 67
percent of seaborne ore, fell in July in almost all cities that
the government tracks, boosting concern that economic growth is
faltering. While demand for iron ore was sluggish, supply is
spectacular, Roper wrote in the report for the unit of Citic
Securities Co., China’s largest brokerage by market value.

“The oversupply situation is only going to worsen over the
next few years,” said Singapore-based Roper, who’s covered the
market since 2001. The property-market slowdown in China “looks
increasingly serious for steel demand next year,” he said.

Ore with 62 percent content at the Chinese port of Qingdao
dropped to $87.40 a dry ton today, the lowest level since
October 2009, according to Metal Bulletin Ltd. The price
averaged about $94 a ton this quarter compared with $121 in the
first three months of 2014.

Goldman’s View

The forecasts from CLSA are in line with the view from
Goldman Sachs Group Inc., which predicts that the raw material
will average $80 a ton next year. Morgan Stanley and Citigroup
Inc. expect prices to average $90 next year.

“For the first time in over a decade, the need to
eliminate iron ore supply, rather than incentivize it, is
determining prices,” said Roper. About 200 million tons of
higher-cost capacity may exit the market as prices drop toward
$80 a ton in the first half of next year, he said.

Increased production in Australia and Brazil will help to
add about 94 million tons of new supply in 2015 from 155 million
tons this year, CLSA estimates. A further 75 million tons will
be added in 2016 and 81 million tons in 2017.

That won’t all be absorbed by China as steel consumption
growth, the driver of demand for iron ore, slows. While the
world’s second-largest economy will import an additional 80
million tons of ore next year, that’ll drop to 15 million tons
in 2016 and 6 million tons in 2017, Roper said.

Declining prices will prompt the closure of higher-cost
supplies in China and from 2016 onward, some seaborne producers,
CLSA said. China’s output would drop from about 340 million tons
in 2013 to a sustainable level of 200 million tons, Roper said.

“From 2016, the story of the iron ore market will switch
from being one of displacement of Chinese high-cost supply, to
being one of displacing marginal seaborne supply,” he said.